Tip from a friend: Australia’s economy is in a slow race to ruin
Sometimes it takes outsiders to say the obvious but unwelcome things: high spending, low growth and red tape are hurting us. Why does Labor fail to see it?
That doesn’t sound much like the “Australian exceptionalism” Jim Chalmers likes to refer to. Australia remains an affluent nation thanks to the neoliberal reforms of the 1980s and 90s and then the lucky country fortune of our made-in-China iron ore boom.
As Matos told the financial press, global investors see Australia’s rule-of-law and relatively stable government as a safe harbour for footloose capital in an unstable world. But to become a “high-growth economy”, we need to break out of our new normal growth rate of just 2 per cent or so.
In other words, Australia ought to be a high-income frontier economy that draws the best of global talent and attracts global capital to its above-average investment opportunities.
Instead of growing by 3-4 per cent, however, we’re settling into a low-growth, European-style welfare state. We’re borrowing to finance more “universal” entitlements that leave close to half of voters reliant on government for at least half their income, according to Centre for Independent Studies research.
What are we doing wrong?
The nub of the matter is explained by another outsider, the Reserve Bank’s English-born deputy governor, Andrew Hauser. Last year, Hauser revealed the truth that Australians don’t appreciate just how affluent we have become in global terms.
And, as he now says, we’re still blessed with extraordinary mineral resources, world-ranking universities, a plum geographical position in the Asia-Pacific, a huge retirement savings pool, relatively low public debt, a strong banking system, proven political and economic institutions, and a track record of openness to foreign capital and labour.
Yet, concludes Hauser, the most plausible reading of the Australian economy now is that it is “boxed in by its own capacity constraints”. It’s like “a racehorse trapped against the course fence, unable to surge forward”, he said a week after Melbourne Cup Day.
Governments could borrow more and the Reserve Bank could cut interest rates further to stimulate demand. But, with the economy operating at close to full capacity, that would just run into its inability to produce more goods and services.
That’s showing up in an inflation rate that has suddenly accelerated to 3.8 per cent, well above the Reserve Bank’s 2-3 per cent target, as demand stays ahead of supply and state governments remove the electricity bill subsidies that previously hid the problem.
The problem is supply, stupid
That, in turn, has rekindled the cost-of-living squeeze politics that federal Labor assumed the economy’s soft landing had dealt with. Yes, inflation has decelerated from its post-pandemic peak of over 7 per cent without a sharp increase in joblessness. But prices have not fallen back to where they were and are still increasing faster than the Reserve Bank can tolerate.
The purchasing power of wages remains lower than before the pandemic. Stagnant productivity means the cost of producing each unit of GDP is growing too rapidly to return inflation to target.
The problem is supply, stupid. More specifically, the economy’s productivity is stuck at 2016 levels. That has forced the Reserve Bank to cut its assumption for near-term annual productivity growth to less than half the performance of the 1990s and 2000s.
And that has cut the central bank’s estimate of how fast the Australian economy can grow to just 2 per cent for each of the next two years, propped up by immigration.
The inconvenient truth is that, after 20 years of unprecedented growth in living standards, Australia has let its envied prosperity slip during the past decade. Rather than an acclaimed standout, we’ve become a “laggard”, according to The Economist.
Who is to blame?
The blame game begins with the ratcheting up in the size of government through a bigger public service, an expanded low-productivity “care economy” and low-returning off-budget spending that extends to Victorian Labor’s outrageous Suburban Rail Loop mega-project.
Facing a decade of budget deficits, federal Labor seems to realise it needs to find fiscal space to pay for political priorities such as Anthony Albanese’s universal childcare and the geopolitical imperative for increased defence spending. That’s even before rebuilding the fiscal cushions in time for the economy’s next downturn.
But the Treasurer’s defiant refusal to reinstate Hawke-Keating and Howard-Costello style budget rules suggests that Labor remains culturally antagonistic to the whole idea of fiscal consolidation.
That’s similarly the case with Labor’s post-Keating re-regulation of the job market prompted by the parliamentary wing’s duty to reward its union paymasters. This threatens to deter the accelerated foreign investment that ANZ’s Matos suggests is needed to break out of Australia’s slow to medium growth performance.
And this will further expose Australia’s high-wage economy and over-regulated industrial relations system that traditionally have been sustained by our coal-based cheap energy advantage.
Rather than becoming a clean-energy superpower, Australia has lost its energy competitiveness as solar and wind have been forced into the power grid. The result is unsustainable taxpayer subsidies for power-hungry smelters and steelworks set up in the era of cheap coal.
Unwisely, Australia has closed off options by ruling out zero-emissions nuclear power and curbing the supply of gas needed to back up weather-dependent renewables. A renewables-based grid appears more vulnerable to the sort of nationwide blackouts that hit the new ANZ chief executive’s native Portugal in April. Matos told a parliamentary committee last week that Australia’s ambitious clean-energy transition raised the risks that “the medicine could kill the patient”.
On top of that, the tax system remains internationally uncompetitive even as Chalmers’ productivity roundtable in August was told we’re a “low-tax economy”. While confirming that Australia’s 30 per cent company tax rate is high by world standards, the Productivity Commission recommends increasing it for big business.
Rather than attracting the world’s talent, an effective 47 per cent top personal income tax rate is encouraging Australians with good ideas to locate offshore. Official projections for closing the budget deficit in the next decade rely on a bigger tax slug on the next generation of wage earners. And that’s before all the thickets of red tape that are piling more regulatory and compliance burdens on business that keep Australia’s growth within its slow 2 per cent speed limit by stopping more houses being built, new mines being developed and new entrepreneurs setting up shop here.
This slow-growth underperformance will show up in a weaker budget position, real wage stagnation and bubbling inflation pressures. In the end, it won’t be reversed until the domestic political debate acts on the obvious truths from outsiders such as Matos, Hauser and the International Monetary Fund.
Michael Stutchbury is executive director of the Centre for Independent Studies.
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Sometimes it takes outsiders to say the obvious but unwelcome things. Such as when ANZ’s new chief executive, globetrotting Portuguese banker Nuno Matos, last week described Australia’s economic growth performance as average to medium.